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Abstract
Physics shows that energy is necessary for economic production and, therefore, economic
growth but the mainstream theory of economic growth, except for specialized resource
economics models, pays no attention to the role of energy. This paper reviews the relevant
biophysical theory and mainstream, resource economics, and ecological economics models of
growth. A possible synthesis of energy-based and mainstream models is presented. This
model shows that when energy is scarce it imposes a strong constraint on the growth of the
economy but when energy is abundant its effect on economic growth is much reduced. This
explains the industrial revolution as a releasing of the constraints on economic growth due to
the development of methods of using coal and the discovery of new fossil fuel resources.
Time series analysis shows that energy and GDP cointegrate and energy use Granger causes
GDP when capital and other production inputs are included in the vector autoregression
model. There are, however, various mechanisms that can weaken the links between energy
and growth. The empirical literature finds that energy used per unit of economic output has
declined in developed and some developing countries, due to both technological change and
to a shift from poorer quality fuels such as coal to the use of higher quality fuels, and
especially electricity. Substitution of other inputs for energy and sectoral shifts in economic
activity play smaller roles.